Government Must Act to Prevent Investment Haemorrhage

Publication date: 26 May 10 |
Source: THE TAX INSTITUTE

The Federal Government must legislate to dispel ongoing confusion from two un-finalised Tax Office determinations or risk a snowballing negative impact on inbound foreign investment, the Taxation Institute of Australia says.

Two draft determinations were due to be finalised today. They focus on businesses using entities based in low tax jurisdictions that have tax treaties with Australia to invest in Australia (known as "treaty shopping") and the tax treatment of the sale of Australian assets held by foreign investors in private equity firms (ie whether the gain on sale is "capital" or "revenue" in nature.)

According to media reports, the Tax Office has advised that the finalisation of both determinations has been delayed until the "government's current review of policy in this general area has been completed". However, the Assistant Treasurer's spokesman has said that there is no formal review being undertaken.

This situation is causing more uncertainty and is not conducive to attracting foreign capital, Institute Senior Tax Counsel Robert Jeremenko said.

"The Taxation Institute believes that there should be some distinction between capital and revenue for tax purposes," Mr Jeremenko said. "The Government now has to step in and legislate to make that distinction clear. Without clarification of the capital / revenue distinction, the effect of the draft determinations will be to discourage overseas investment.

Federal Court judge Justice Richard Edmonds used the Tax Institute's annual convention in March to call for legislative change to the treatment of capital and revenue for overseas investors.

"That just underlines the level of disquiet that the ongoing uncertainty around this issue is creating," Mr Jeremenko said.

The Tax Institute believes that the approach in the draft determinations is contrary to the Government's policy position in relation to foreign investment, especially the relaxing of capital gains tax rules in 2006 for non-residents which were meant to encourage investment.

"Long-standing practice prior to the issuing of the draft determinations was for gains from many private equity funds to be treated on capital account and thus be subject to concessional capital gains tax treatment," Mr Jeremenko said.

"While the basing of entities in ‘tax havens' for tax avoidance reasons cannot be supported and must be legislated against, some companies have been structured that way for genuine commercial or regulatory reasons imposed by other tax jurisdictions."